Banks Profit as Quant Trading Goes Mainstream

Fueling this surge is investor fear that traditional approaches cannot keep pace with artificial intelligence, alongside a desire for active strategies beyond passive indexing and a need to navigate volatile markets. The Murdock Trust, for example, shifted 3% of its $2.1 billion portfolio to Goldman Sachs QIS funds, while the American Red Cross now largely relies on QIS programs.

Banks find QIS highly attractive because the revenue is nearly risk-free, reliable, and requires less capital, with computers being more cost-effective than human portfolio managers, as noted by Glenn Schorr of Evercore ISI. JPMorgan's QIS revenue rose 30% this year, accelerating from 25% growth in recent years.

However, risks exist: QIS returns have been uneven, strategies risk becoming "overcrowded" (Ramon Verastegui, Kairos Investment Advisors), and aggressive hedge funds, like Paloma Partners where Arnab Sen works, are trying to front-run QIS trades, potentially exacerbating market moves. Despite these risks, banks continue to profit significantly from management fees and bid-offer spreads.